Understanding the Development Path for Li-ion Battery Technologies

Last Tuesday a reader who works as a consultant in the energy storage and hybrid electric vehicles industries and sent me an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2009, a high-level policy analysis that discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of Li-ion batteries. The draft roadmap was written during the last days of the Bush administration, has since been partially implemented in the American Reinvestment and Recovery Act of 2009 and has never been officially released by the DOE. It does not necessarily reflect the latest policy views of the Obama administration. While I don't generally feel comfortable writing about documents that have not been publicly released, I've discussed most of the basic issues and challenges in other
articles and believe the conceptual framework, industry assessment, development goals and timelines discussed in the draft roadmap can help energy storage investors make better decisions. So I've decided to take a deep breath, begin with a couple of important quotes, summarize the broad investment themes that can be extracted from the draft roadmap and try to tie it all back to a likely future for the energy storage sector. This is complex stuff so I encourage readers to offer comments and ask questions.

The introductory paragraph of the draft roadmap says:

"Advanced
batteries will play a significant role in the energy and economic
security of the United States; therefore, ensuring a domestic supply of
this technology is critical. Advanced batteries are essential for the
development of electric drive, high-efficiency, light-duty, and
heavy-duty vehicles. They are also seen as a critical enabling
technology for the large scale deployment of renewable energy sources
such as wind and solar. In addition, other applications, such as those
in the defense and intelligence industries, would benefit from the use
of advanced batteries. Current batteries for these applications are
beginning to approach performance targets, but their price, size, and
abuse tolerance do not yet meet market standards. In addition, nearly
all high-volume advanced battery manufacturers are located in Asia. In
contrast, the United States has limited manufacturing capability and a
small number of trained battery engineers, scientists, and line
workers. To be a global leader in the production and sale of advanced
batteries, the U.S. must rapidly develop improved technology and
establish a U.S.-based battery manufacturing capability."

While the frank message of the
introductory paragraph is stunning, the follow-up discussion of the
principal barriers to the development and commercialization of Li-ion
batteries is an even bigger eye opener.

"PHEV Battery Barriers: PHEV
batteries face many of the same challenges associated with HEV
batteries (uncertain calendar life, cost, abuse tolerance) plus
additional challenges with energy density and specific energy. There is
also concern that the deep cycling required of a PHEV battery
all-electric range operation will be more difficult than the shallow
HEV cycling. The Vehicle Technologies Program Office does not believe
that NiMH systems will be able to meet the weight and volume targets of
a PHEV battery with greater than a 10- or 20-mile range. ... Although
Li-ion batteries can provide the energy and
power for a 10-mile system, 20- to 40-mile goals are very difficult
even for them. The major challenges to developing and commercializing
batteries for PHEVs are as follows:

Cost – The current cost
of Li-based batteries is approximately a factor of three to five times
too high on a kWh basis. The main cost drivers are the high cost of raw
materials and materials processing, the cost of cell and module
packaging, and manufacturing costs.

Performance – Much higher
energy densities are needed (for the 40-mile or greater system) to both
meet the volume and weight targets and to reduce the number of cells
needed for an entire battery, thus reducing the system’s cost. In
addition, durability and reliability of current batteries needs to be
assessed and possibly improved for use in passenger vehicles.

Abuse Tolerance – Many Li
batteries are not intrinsically tolerant to abusive conditions such as
short circuits (including internal short circuits), overcharge, over
discharge, crush, or exposure to fire and other high-temperature
environments. The use of Li chemistries in these larger (energy)
batteries increases the urgency with which these issues must be
addressed.

Life – Hybrid systems
with conventional engines have a life target of 10 to 15 years, and
battery life goals have been set to meet these targets. The goals of
300,000 HEV cycles and 5,000 deep discharge cycles are either unproven
or are anticipated to be difficult. Specifically, the impact of
combined EV/HEV cycling on battery life is unknown, and extended time
at high state of charge (SOC) is predicted to limit battery life.

EV
Battery Barriers: For EV batteries, the challenges are
similar to those for PHEVs (weight, volume, calendar life, cost, and
abuse tolerance), but the challenges are more difficult. Batteries can
be developed to meet these targets, but they will be a generation
beyond the current state of the art. In general, the research to meet
the challenges associated with EV batteries will build on work done on
PHEV batteries, just as research for PHEVs will build on the battery
technology used in HEVs.

Renewable Energy
Storage Barriers: DOE is also
considering the role of electrochemical energy storage systems for
optimizing the use of renewable energy sources to reduce U.S.
dependence on foreign oil. Affordable energy storage could enable
increased market penetration for many renewable energy sources such as
solar and wind. The targets of this application are different than
those for transportation, and alternative electrochemical energy
storage technologies need to be considered. In this application, energy
density is less important than for PHEV and EV applications. Of
paramount importance are (a) low cost, (b) long cycle and calendar
life, (c) high system reliability, (d) low maintenance, (e) low
self-discharge rates, and (f) high system efficiency."

I've read the draft roadmap several times and think the DOE's development plan for Li-ion batteries has a reasonable chance of success from a governmental policy perspective. Nevertheless, I
believe the plan will expose energy storage investors to a high level of
business, competitive and technical risk that will take the better part of a
decade to resolve. The simple summary for those who do not have the
time to study the draft roadmap in detail is:

Battery manufacturing is a national security issue and America
cannot rely on imports for this fundamental need;

Catching up with Asia is not enough and America must become the
global leader in energy storage technology;

The best available Li-ion battery chemistries are not robust or
stable enough to power America's energy future;

The best available battery manufacturing technologies are too
expensive for a mass-market product;

Current material supply chains are not reliable enough to protect
America's national security interests;

Li-ion batteries cannot become commercially viable without a
massive government funded effort to advance the state of the art in battery manufacturing and Li-ion chemistry through two generations over
the next decade;

The activity we've seen over the last few years is
merely a prelude to the main event; and

Substantially all of the recently announced plans to build limited numbers of PHEVs and
EVs for sale into "entry markets" like state fleets, city busses, utility fleets, USPS vehicles, private delivery fleets and the military are essential steps in the R&D process that allow manufacturers to validate the technical potential of their products before commercial roll-out; and

Mass market commercialization of Li-ion batteries cannot occur unless and
until all essential R&D work is successfully completed.

While I'm reluctant to compare the development plan for Li-ion batteries
with the Manhattan Project, which cost $24 billion (in CPI adjusted
dollars) and employed 130,000 scientists, engineers and technicians,
the combined governmental and private sector investments could easily
be in the same price range by the time the dust settles.

We are entering the age of cleantech,
the sixth industrial revolution. We are also witnessing the birth
of massive new consumer markets in South America, India and Asia that
will put unimaginable strain on global supplies of water, food, energy
and every commodity you can name. In combination, these mega-trends guarantee 10 to 20 years of gut wrenching change and economic
dislocation. I have enough oil and gas experience to know that the oil
industry will not be able to increase production to levels that satisfy
the future
demand projected by McKinsey and other macro-economic analysts. I have enough experience in energy storage to believe that by 2020 Li-ion battery manufacturing technology and chemistry will probably advance to a
point where PHEVs and EVs are cost effective. But given my age,
experience and financial responsibilities, I'm unwilling to put my
portfolio at risk by trying to pick the winners of a business marathon
that will take a decade or more to run and be subject to the unpredictable and highly variable winds of political and economic change.

I recently reviewed a slideshow presentation from a September 2008
clean air conference that described the auto industry as a serial
victim of technology du jour syndrome and offered the following
table to prove the point.

25 years ago

Methanol

15 years ago

Electric vehicles

10 years ago

HEVs and Electric vehicles

5 years ago

Hydrogen Fuel Cells

2 years ago

Ethanol

Today

PHEVs and Electric vehicles

2011

What’s next?

It's enough to make you go Hmmm.

Every analytical report I've seen concludes that global demand for
energy storage devices will grow at extraordinary rates for several
decades. Over the next few years, the substantial bulk of the revenue
growth will go to existing producers of lead-acid batteries that can
deliver proven products from existing factories. As cost-effective
Li-ion battery manufacturing technologies and chemistries are developed, tested, validated and
commercialized, they will rapidly become the preferred choice for
extreme performance applications like PHEVs and EVs. As these technologies mature, Li-ion batteries may even make inroads into less demanding
applications that have traditionally been the province of lead-acid
batteries. Over the longer term a new equilibrium will develop where
lead-acid batteries are used for certain applications and Li-ion
batteries are used for others. Unless the market forecasts I've seen are
seriously misguided, manufacturers of all classes of energy storage
devices will have a hard time keeping up with expected demand.

We don't live in a black or white world and it is patently absurd to
think that the future of energy storage will be black or white. The
reality is far more likely to be a richly mottled canvas dominated by
various shades of green. The simple fact is that we need every energy
storage technology that's ever been invented, and more. I believe
Li-ion batteries, lead-acid batteries, lead-carbon batteries, flow batteries, pumped hydro,
compressed air, thermal solar and flywheels will all make important contributions to
the energy storage solution. So I believe a balanced portfolio of
energy storage stocks is the only sensible approach for investors who
don’t have the time, inclination or ability to do their own detailed research.
Articles like this one can provide food for thought, but they should
not be relied on as investment advice because every author (including
me) has his own agenda, preferences, predilections and prejudices.

As an investor, my goal is to buy low and sell high. Based on five
years of work in the energy storage sector, I’m convinced that near-term growth in the Li-ion
group will be slower than most people expect while near-term growth in the
lead-acid group will be faster than most people expect. If my basic
thesis about future rates of technological development and revenue growth is
correct, the companies in the lead-acid group are likely to perform far
better over the next few years than the companies in the Li-ion group.

Readers that want to develop a deeper understanding of the issues and opportunities in the energy storage sector may want to join me in San Diego for Infocast's Storage Week on the 13th through 16th of July. The speaker's list includes more than 80 thought leaders from the battery industry, the government, the utility and automotive industries and the research and development sector. I'll be participating in three panel discussions and hope to return home with new investable insights that I can share with readers in future articles.

DISCLOSURE:Author is a former
director and executive officer of Axion Power International (AXPW.OB)
and holds a large long position in its stock. He also holds small long
positions in Active Power (ACPW),
Exide (XIDE),
Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works
as a partner in the law firm of Fefer
Petersen & Cie and represents North American, European and
Asian clients, principally in the energy and alternative energy
sectors. His international practice is limited to corporate securities
and small company finance, where he focuses on guiding small
growth-oriented companies through the corporate finance process,
beginning with seed stage private placements, continuing through growth
stage private financing and concluding with a reverse merger or public
offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School
and a 1976 graduate of Arizona State University. He was admitted to the
Texas Bar Association in 1980 and licensed to practice as a CPA in
1981. From January 2004 through January 2008, he was securities counsel
for and a director of Axion Power International, Inc. a small public
company involved in advanced lead-carbon battery research and
development.